Conventional vs. 203k Loan

10 Replies

Hello! I'm trying to compare whether to use a conventional or 203k loan. I tried to run some numbers as you can see in the image below. What else should I be considering when comparing these two options?

I'm leaning more towards going the 203k loan route due to not having to bring as much to the table. If I were to go the conventional route It would keep me on the sidelines for too long as I have to save up for a lot more. I understand that I would have a higher PMI cost while in the 203k loan until I refinance into a conventional loan with a LTV of 80% at the most.

Note: These numbers are theoretical. I'm just trying to see what it would cost when comparing the two.

Cameron,

One thing to always check first is your County FHA loan limit. Even with FHA 203K you cannot go over the county limit with renovations and other costs. If your all set and your total loan falls under the SFR limit I would still suggest looking at conventional lending just for the immediate issues on the rise with inflation. I would not want to be stuck in a FHA loan that is under water due to current inflated home prices. We have a storm brewing right now and the CARES act is supposed to end in October leaving a lot of people in a situation where they may lose their homes.

If that does happen Nationwide that will cause a high number of foreclosures and short sales. That will negatively effect the home values on the rise leaving a lot of people unable to refinance out of an FHA or in general to pull out any ARV cash.

If it happens to where a lot of people are predicting some of these 203K loans that offer a 110% above property's "Future" home value. Will end up under water due to inflated ARV or just maxed out under current inflated values. At least with conventional you have a tighter more managed set of guide lines.

@Cameron Clark

is this for a single family? how about a conventional reno loan? Skip the FHA-203k and just use the conventional renovation loan version... That should probably be a limit of 5%.

Also, your "closing cost" seem astronomical...  Rather, you should break it down into what I'll call "actual costs/fees" and "prepay/escrows."  The former are actual fees such as Title Search, Title insurance, attorney fee, Closing Agent fees, survey, recording fees, etc.  The latter is the amounts to establish escrows for mortgage payments, property taxes, etc.  Whatever hasn't been paid out will come back to you.  That is why a "good" estimate from the lender will give you a 'cash to close' value.

On the refi, the "closing costs" should be very limited to just some fees.  I haven't done a refi in a while, but I thought the prepay/escrows will roll over.  So, your cash to close should just be limited to the actual fees to close and record the transaction.

Also, your FHA actual closing costs should be much higher due to the ufmif. I know people like the "FHA" loan due to its sort of slightly "lower" qualification requirements and ability to do 3.5% down, but you still "pay" for those benefits.

N.B.  I didn't actually go over your numbers.  But for sure, if you can roll the rehab cost into the loan, its less cash you need on hand to be able to do this effective brrrr-type deal.

Good luck.

@Cameron Clark

Your lender should know about them, otherwise you need to find another lender -- which is possible. Basically, you are asking for a "non - FHA 203k" loan product, or a conventional-type rehab/reno loan. Good luck.

@David M.

Good to know. I would like to stay on the conventional loan side so this is really helpful!

If I do a conventional-type rehab loan, after the rehab, I can just get the property appraised and pull out a HELOC afterwards correct? (assuming there is enough equity in the deal after the rehab).

@Cameron Clark

I think, theoretically, sort of..  the "70% rule" is there to get you to 80%...  Its a matter of how percentages are applied when calculating.  I didn't run it through entirely even in my head.  Your OP doesn't have much detail about your theoretical deal so don't get too far ahead of yourself.